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Pharma's growing concern over parallel trade

Posted on: 05 May 06

Summary

In recent years, parallel trade of pharmaceutical products has grown to some the highest levels ever seen, exerting additional pressure on pharmaceutical companies' profitability. Companies need to be proactive to restrict parallel trade, especially in the EU, which is expected to continue to be the market of most concern for pharmaceutical firms.

Parallel trade of pharmaceutical products has risen over the past few years, driven by payers seeking to lower prescription drug expenditures and parallel traders seeking to cash in on the price differential of drugs in different countries. This has made parallel trade a growing concern for pharmaceutical companies - particularly those companies operating in the EU, where a high level of parallel trade exists because of EU law supporting the free movement of goods between member states.

As a result, pharmaceutical companies are facing an increasingly difficult environment to drive growth in, combined with additional pressures from failing R&D productivity, increasing regulatory pressures and an impending wave of patent expiries.

While parallel trade is legal between EU member states as part of the EU's objective to integrate Europe into a single market, support for legalizing drug importation in the US had been gaining momentum until recently. Since 2000, two bills allowing drug importation have been passed in Congress. However, successive secretaries of health and human services have failed to allow the implementation of the legislation, citing that they could not guarantee the safety of foreign drugs imported and ensure that consumers would make substantial cost-savings. Although drug importation remains illegal, there has been a low level of illegal drug importation by individual Americans seeking to lower their prescription drug expenditures as a result of the FDA's discretionary policy regarding this.

Medicare has reduced demand for cheap foreign drugs

The affordability of drugs has been a major issue in the US, particularly for the millions of uninsured Americans that are personally responsible for paying the entire costs of their drugs. Many have sought to reduce their drug costs by purchasing and importing foreign drugs mainly by foot traffic or via internet pharmacies.

The US government has recently taken steps to address the issue, with the launch of the Medicare Part D program on January 1, 2006, providing people over the age of 65 and people with disabilities with prescription drug benefits for the first time. Anecdotal evidence has indicated that the program has subdued the pressure for legalizing drug importation and reduced the level of illegal drug importation that has been happening for several years.

However, drug importation has not completely diminished as there are still millions of uninsured Americans who do not have prescription drug coverage and are importing drugs to lower their drug expenditures.

Later this year, there is expected to be a surge in drug importation as millions of Medicare participants reach the 'doughnut hole' in Medicare Part D coverage, where they are entirely responsible for drug costs, and seek cheaper alternatives such as generics or parallel imports. However, seven pharmaceutical companies are developing a patient assistance program, known as Bridge Rx, to help participants bridge the gaps in coverage and prevent this switching to cheaper alternatives. It is expected such a program will help patients continue to buy locally-sourced drugs rather than turning to drug importation to reduce their prescription drug costs.

In addition to the Medicare Part D program, the continued restriction of drug supplies by some of the leading drug manufacturers to those Canadian pharmacies known to be selling foreign drugs to Americans is expected to contribute to the decline in drug importation in the US over the next few years.

EU parallel trade to rise

While there is a downward trend in parallel trade in the US, parallel trade in the EU is expected to be stable for the short-term and then begin to gradually rise in the longer term as the impact of the most recent EU enlargement and future ones materialize.

Although there were fears among the pharma industry that the recent enlargement of the EU in 2004 would result in a flood of cheap prescription drug exports hitting the shelves of pharmacies in the 'old' member states, this has failed to materialize as yet. One of the key factors for this has been the low volume of branded prescription drugs available in many of these countries as a result of their small populations and high penetration of generics. In addition, analysis of drug prices has indicated that the price of some drugs are similar, if not higher, than other common sources for parallel traded drugs, like Spain and Greece.

However, one of the most important factors is the derogation included in the Accession Treaty for eight of 10 of the accession countries, which prevents the parallel export of drugs from those countries where there was no equivalent patent protection available when the patent was originally filed in an EU member state.

Such patent protection was only introduced in these eight countries between 1991 and 1994. Given that it typically takes at least 10 years for a drug to reach the market after the patent for the product has been filed, the majority of branded products already launched in the EU are likely to be protected from parallel trade from most of the new accession countries because of the derogation.

However, going forwards, the effect of the derogation will be eroded as new products are launched, which is then likely to contribute to a gradual increase in parallel trade.

The accession of Bulgaria and Romania in 2007 or 2008 is expected to impact parallel trade in a similar manner to the most recent accession countries. However, the possible accession of Turkey in the future poses a serious threat to parallel trade in the longer term given the substantial volume of branded prescription drugs available at low prices in this market.

Pharma firms should be proactive

Although pharmaceutical companies are restricted in the actions they can take to limit parallel trade in the EU, there are some measures that companies have used to effectively tackle the situation. Supply quota systems have become one of the most popular strategies, particularly following the European Court of Justice's landmark ruling on the Bayer Adalat case in 2004, which paved the way for companies to design and implement such systems without infringing on community law.

Pricing strategies have been used selectively to tackle parallel trade, essentially reducing the price differential between markets, a key driver of parallel trade. In 2005, a number of pharmaceutical companies used the compulsory PPRS price cut in the UK to modulate the prices of particular products and packs that were subject to high levels of parallel imports. In June 2005, Pfizer made a bold step by introducing a dual pricing system with wholesalers in Spain for products sold domestically and those exported - however some complaints have been filed and the European Commission is currently investigating the legality of the strategy. It remains to be seen whether Pfizer will be allowed to continue this strategy, following the European Commission's previous decision to ban Glaxo Wellcome's dual pricing system back in 2001.

Drug manufacturers can of course take the 'do nothing' approach using the argument that parallel trade is legal, and it allows companies to focus their resources on other issues. However, in Datamonitor's view, this is a risky approach to take because, as competitors take action to restrict parallel trade, this will leave products vulnerable to attack from parallel trade.

As a result, companies should actively monitor the situation, assessing what their competitors are doing to determine when and what action should be taken to limit parallel trade.

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